What does it take to go overweight on Chinese stocks? US$5.5 trillion of credit expansion, BCA estimates

  • Hold off from going overweight on Chinese stocks as strong January financing data obscures below-par trend against past easing cycles, BCA says
  • Stocks have weakened 0.5 to 1 per cent despite encouraging January data, underscoring caution among investors

China will require no less than 35 trillion yuan (US$5.5 trillion) in credit expansion to steady the economy and stem an earnings recession, and stock investors should not be swayed by January’s seasonally-strong financing data, according to BCA Research.

The sum would be needed to revive sagging domestic demand and anything short of that target would mean investors should bide their time in upgrading the market to overweight within a global portfolio, strategist Sima Jing said in a report on February 16.

“Our calculation suggests that a minimum of approximately 35 trillion yuan of new credit, or a credit impulse that accounts for 29 per cent of this year’s nominal gross domestic product, will be needed to stabilise the economy,’’ she said. The jump in credit creation in January was “less than meets the eye, compared with previous easing cycles and adjusted for seasonality,” she added.

China credit fiscal impulse


Investors remain guarded, judging by the returns on the CSI 300 and CSI 500 Index that track the biggest stocks in Shanghai and Shenzhen. The gauges have weakened by 0.5 to 1 per cent since February 10, when China published the January credit data. The CSI 300 gauge slipped into bear territory last month, having lost at least 20 per cent from the February 2021 peak.

BCA arrived at its 35 trillion yuan estimate based on the flow of TSF as a share of GDP. That ratio needs to hit at least 28.5 per cent to reduce the odds of a major earnings contraction to below 50 per cent. It assumes an 8 per cent growth in China’s nominal GDP in 2022.

Aggregate total social financing (TSF) more than doubled in January from December. Yet, the year-on-year increase was slower than the pace seen in China’s previous easing cycles, such as in 2013, 2016 and 2019, according to the Montreal-based research firm.

Credit creation in January reached 6.17 trillion yuan in January, lifted by a seasonal boost and a front-loading of government bond issuance, corporate borrowings, and an uptick in lending like trust loans and acceptance bills within the shadow banking sector.

“The strong credit data in January illustrated that policymakers were on the move and pushed more aggressively for monetary policy easing,” Goldman Sachs economists including Maggie Wei said in a February 11 report.

The expansion in credit was much needed, following a void of key policy signals and strong data releases in January, analysts led by Lin Sha at Dongxing Securities said in a note published on Friday. The lending figures “will have a positive impact on stocks,” Lin added.

While the trend has raised some optimism, it may still be too early for stock investors to bet on a swift rebound, according to Sima at BCA Research.

First, credit growth is always abnormally strong in January. Banks typically increase lending at the start of a year to expand their assets before administrative quotas kick in, BCA said. In recent years, loans made in January accounted for 17 to 20 per cent of total bank credit for an entire year.

Second, the 980 billion yuan increase in TSF from a year earlier was weaker than during the first month of previous easing cycles, including more than 1.4 trillion yuan spike in 2016 and 2019.

“It is premature to upgrade Chinese stocks to an overweight cyclical stance on six to 12 months within a global portfolio,” Sima added. “For now, we recommend investors stay only tactically overweight in Chinese investible equities versus the global benchmark, given their cheap relative valuations.”

Author: Cheryl Heng, SCMP

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